“I don’t know what all these banks did to deserve all this but once again, when you are fining the bank, you are fining the shareholders of the bank who had nothing to with what management did. So if management did something egregious or criminal go after the people that did it and stop taking the shareholder’s wealth.”

- Howard Ward GAMCO CIO

Since I started this column, I have on occasion used this platform to poke holes in the weak analysis, bad theory and just plain dumb ideas that bounce around Wall Street all too regularly. Today, I want to highlight a surprisingly common belief that simply fails to withstand close scrutiny. Indeed, it is so rife with the sort of sloppy, ill considered thinking that it cried out for a response.

The quote above is fairly typical of the genre. Not to pick on Howard Ward or anyone else but there is this entire school of thought that treats shareholders as passive victims of reckless prosecutors. There have been some truly awful spin made in response to the recent criminal prosecutions of large banks, but this one takes the cake.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Why Make Shareholders Accountable?”

How about shareholders writing into the contract of CEO’s that any fine to the company will be deducted from the CEO pay and stock options. I will give them that there is no way to completely prevent the hire of an incompetent CEO, but there are ways to make sure he takes the consequences of his poor leadership.

This is the polar opposite fo the financial industry which designs unsafe products and companies with the illusion of being safe. The shareholders and customers are happy with that until it becomes evident in retrospect that these things really were unsafe. They simply thought that management and market risk was just a guaranteed way to make more money.

No it wasn’t.
mortgage origination fraud, title fraud, insurance fraud, servicer fraud, conspiracy to defraud, use of the mails to defraud, from soup to nuts it was a massively lawless operation designed specifically to avoid the legal constraints of the straight bank lending route to mortgage origination. Naked Capitalism covered extensively as did Barry Ritholtz in his Big Lie series.
What is lacking is a will to prosecute by the Justice Department, FBI, and lower level officials. Every title that went into the MERS system was in violation of county title ordinances. Every falsified title document, note and lien is a criminal act. This was a worldwide criminal conspiracy between mortgage originators, ratings agencies, banks, servicers, MERS, real estate agents, appraisers, and brokerages, dependent on perverse incentives, hubris and the conservative notion that ripping off the poor and middle class is perfectly acceptable because they are chumps who deserve it, derived from Ayn Rand’s epic tomeshttp://www.msfraud.org/law/lawarticles/CRC-Report-Chasm-Between-Words-and-Deeds_Loan-Mod-Scam_5-14.pdf.

The problem is that all the officers and board members have directors and officers insurance that pays off unless some act is proven criminal. I.E. they are insured against the results of stupid decisions. Of course now that it has been seen that this can happen, the stocks will reflect the possibility. Also the D&O insurance premium will go up but that is paid by the company directly, to induce someone to take the jobs. My thought has been to make investment banks back into partnerships with the public being a limited partner and all officers being unlimited liability partners. So the investment banks would have the capital they need and the officers would watch each other like a hawk since they could loose big if someone screws up.

While I understand the article’s concept – “They are the ones with the power ..”, I take issue with the idea for the fact that a vast number of shareholders are oblivious individuals who own these stocks through their mutual or pension funds, who are now being forced to renegotiate their retirements in some cases.

Also that executives have acclimated themselves to an excess of confidence & risky behavior through being insulated by shareholders money.

This excess confidence is what led to the CDO scam, banks knowingly pushed garbage loans with the intention of packaging fraudulent CDO’s, paid ratings co’s to rate them triple A – was that the shareholders responsibility? … the average pension fund beneficiary?

Not one member of the TBTF C-suite has had to personally account for the risks they took, have reaped countless billions in bonuses through the scam over a period of years, while millions lost their pensions, jobs and net worth..

While these banking executives have a proven degree of insulation for their misdeeds, is it really the responsibility of he 55 year old firefighter to know what’s in his pension fund, and to have to pay for those misdeeds under the guise he was supposed to know?

I do agree that there is a problem with pension fund managers stupidity and corruption. Being wined, dined and bribed to overlook things and then fail to protect the companies they are investing in against the inside plunder jobs.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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